Determining cost of shares post corporatisation/demutualisation: original cost basis & indexation benefit.

The case involved determining the cost of shares allotted to members of Bombay Stock Exchange (BSE) post corporatisation/demutualisation and the availability of indexation benefit on the sale of such shares. The Third Member concluded that the cost of shares should be based on the original cost of the membership card as per Section 55(2)(ab) of the Income-tax Act, and the period of holding for indexation purposes should commence from the date of the original membership of BSE. The decision was referred to the Division Bench for further action in line with the majority opinion.

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Issues Involved:
1. Determination of the cost of shares allotted to members of Bombay Stock Exchange (BSE) pursuant to its corporatisation/demutualisation.
2. Availability of indexation benefit on the sale of such shares.

Issue-Wise Detailed Analysis:

1. Determination of Cost of Shares:
The primary issue was whether the cost of shares allotted to members of BSE pursuant to its corporatisation/demutualisation should be calculated as per Section 50 or Section 55(2)(ab) of the Income-tax Act, 1961, if depreciation was claimed on BSE membership.

The assessee, a company incorporated under the Companies Act, 1956, paid Rs. 94.50 Lakhs to become a member of BSE and claimed depreciation on this membership, which was initially disallowed but later allowed by the Supreme Court, treating it as an intangible asset. Upon corporatisation and demutualisation of BSE, the assessee was allotted shares and trading rights in BSE Ltd. The assessee computed the cost of shares based on the original cost of membership and claimed indexation from the date of acquisition of the membership right.

The Assessing Officer held that the cost of the shares should be the Written Down Value (WDV) of the membership right due to the depreciation claimed, as per Section 50, to prevent double deduction. However, the Judicial Member of the Tribunal argued that Section 55(2)(ab) specifically provides that the cost of acquisition of shares should be the original cost of the membership card, not the WDV, and this should be applicable even if depreciation was claimed. The Accountant Member disagreed, maintaining that Section 50 should apply to prevent double deduction.

The Third Member resolved this by stating that Section 55(2)(ab) is clear and unambiguous, specifying that the cost of shares should be the original cost of the membership card. The provisions of Section 50, which apply to depreciable assets, do not apply to shares as they do not form part of the block of assets for depreciation purposes. The Third Member emphasized that the specific provision of Section 55(2)(ab) should prevail over the general provision of Section 50, and the legislative intent was considered while bringing in Section 55(2)(ab), even if it results in a double deduction.

2. Availability of Indexation Benefit:
The second issue was whether the indexation benefit on the sale of such shares would be available from the date of corporatisation/demutualisation of BSE or from the date of acquisition of the original membership of BSE.

As per clause (ha) inserted in Explanation 1 to Section 2(42A) by the Finance Act, 2003, the period of holding of shares should include the period for which the person was a member of the recognised stock exchange prior to such demutualisation or corporatisation. Therefore, the period of holding should be reckoned from the date of the original membership of BSE, not from the date of allotment of shares in BSE Ltd.

Conclusion:
The Third Member concurred with the Judicial Member's view that the cost of shares should be the original cost of the membership card as per Section 55(2)(ab), and the period of holding for indexation purposes should be from the date of the original membership of BSE. The decision was directed to be listed before the Division Bench for passing an order in accordance with the majority view.

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